One of Canada’s big banks is calling for the country’s cooling housing market to hit a low point in the spring before fully adjusting to rising interest rates.

RBC assistant chief economist Robert Hogue said in a report Friday that home buyers are “on the defensive” as the Bank of Canada continues to raise interest rates. The central bank delivered a 75-basis-point hike last week and signalled rates will have to rise further in the months ahead as core inflation remains hot.

But the higher cost of borrowing has sent a chilling effect through the housing market, with the Canadian Real Estate Association (CREA) reporting Thursday that home sales in August were down 1% compared with July and 24.7% lower than the same month last year.

CREA also trimmed its forecast for both housing activity and price growth. It now expects home sales to decline 20% by the end of 2022 relative to last year’s peak.

Hogue’s forecast is even more dire, however, expecting a 23% decline in year-over-year sales by the end of this year and a further 14% drop in 2023.

RBC is now calling for the Bank of Canada’s benchmark interest rate to hit 4% by year’s end, up from an earlier call of 3.5%.

“Higher interest rates will disqualify more buyers from obtaining a mortgage and shrink the size of a mortgage others can qualify for,” Hogue wrote.

He added that, “fewer—and more budget-constrained—active buyers in the market are taking steam out of prices.”

Hogue wrote Friday that he expects the housing market will adjust to the higher-rate environment early next year.

Come spring, he expects Canadian home prices will bottom out around 14% lower than the peak seen in February 2022.

That drop would be steeper in Ontario and British Columbia, he added, calling for home prices to drop 16% peak-to-trough in both provinces. Alberta and Saskatchewan, meanwhile, would see only a 4% decline in prices, Hogue predicts.

Hogue’s estimates are more conservative than other market forecasts.

TD Bank said in late August that it expects an “unprecedented” 20% to 25% drop in home prices in the first quarter of 2023 from the highs a year earlier.

Credit union Desjardins also expects a decline of nearly 25% in home prices by the end of 2023.

When will Home Prices Bottom Out in Canada? RBC Says Spring by Craig Lord | Global News